As a report claims the Government is a top offender in paying small firms late, former Dragon Sarah Willingham shares her tips to get paid on time

Small firms continue to be buffeted by late payments - and the government is a top offender, according to the Federation of Small Businesses.

The Government has decried late payments to small and medium-sized enterprise suppliers in the private sector - even going as far as introducing a measure in April 2017 forcing all large UK companies to disclose their payment practices to tackle it.

Yet nine out of ten (89 per cent) public sector suppliers have been paid late according to research from the FSB.

The FSB has called on the government to introduce penalties for departments, agencies and public bodies who fail to pay invoices on time

The research, based on responses from 1,511 FSB members, revealed that only 12 per cent of modestly-sized companies supplying central government are always paid on time.

Meanwhile, local governments and those running public infrastructure projects pay only 9 per cent of SME suppliers within the pre-agreed payment deadline, the survey found.

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HOW THIS IS MONEY CAN HELP

Mike Cherry, FSB's national chairman, said: 'Our research highlights a shocking failure in the public sector – the government needs to get a grip if we are to have a chance of stamping out the poor payment culture running rampant in the UK economy.

'It is unfair and unacceptable that so many small firms, many of which are already struggling with the high cost of doing business, are also being forced to wait for money they are owed for work completed for the public sector.'

Late payments of invoices has been a thorn in the side of SMEs for quite some time but was propelled back into the limelight following the collapse of Carillion.

The government's response

A government spokesman said: 'We do not recognise these figures - small business are the backbone of our economy and Government departments pay at least 96 per cent of valid invoices within 30 days, in accordance with our prompt payment policy.'

The construction firm shut up shop earlier in the year, leaving behind hefty debts to an extensive network of SME suppliers.

SMEs are owed around £26billion in overdue payments, according to research by payments processing company Bacs, while the FSB predicts that 50,000 UK businesses cease trading every year because of the issue.

Speaking to This is Money, economist Vicky Pryce said that delayed payments could stymie innovation and have wider implications on the UK economy.

According to latest government statistics, SMEs accounted for 99.9 per cent of all private sector companies in Britain at the start of 2017, employing a total of 16.1 million people and piling billions into the economy.

Pryce said: 'Late payments will force some businesses to explore other means to fund basic things like their workers' salaries. For many, this will involve using their business bank account overdraft, or even take out a loan. This lands them in debt that they really shouldn't have.

'Given that SMEs are faced with other challenges like a potential reduction in the supply of worker following Brexit, businesses need to be encouraged to innovate and invest in technology to help streamline their business process.

'But how are they meant to do that if they are not getting paid properly?'

The FSB has called on the government to introduce penalties for departments, agencies and public bodies that fail to pay invoices on time and force them to automatically pay interest on any payments made later than contract terms.

Cherry added: 'The government needs to lead by example and ensure that small public sector suppliers are paid promptly on completion of their work.

'This starts with the government, and its strategic commercial suppliers, making sure that prompt payment is embedded throughout their supply chains.'

Private sector

A separate study by accounting software firm Xero, found that more than half of invoices were paid late last year.

The research, based on 250,000 UK subscribers using Xero, also revealed that SME invoices were paid after 40 days on average over the past year.

To put this into context, the average payment delay is 30 days from the invoice date.

FTSE 350 firms take on average six days longer to pay their SME suppliers according to the data.

A sector breakdown suggests that the UK's largest food producers are the worst offenders, taking 60 days to honour invoices.

On the opposite end of the scale,the fastest FTSE 350 firms to pay invoices were the life insurance, financial services and real estate investment trust.

Companies in these sectors paid invoices within 33, 35 and 38 days respectively - which is still below the 30 day average.

Gary Turner, co-founder and managing director (UK) of Xero said: 'We hope that a greater understanding of the small business economy will help firms, and their suppliers, develop their own economies of scale - helping them close the gap on larger enterprises which traditionally benefit from those economies.'

Follow these tips to get paid on time

Former Dragons' Den panellist Sarah Willingham is no stranger to the issue of late payments

Sarah Willingham, serial UK entrepreneur and former Dragons' Den panellist , is no stranger to the issue of late payment of invoices.

She told This is Money: 'Most of my investments are very small businesses meaning we don’t have the luxury of large teams in finance to chase invoices.

'In fact, in the early days it’s down to the founder, which is a really unproductive use of their time.'

With this in mind, Willingham outlined four basic tips on getting paid on time.

1. Automatic reminders

We find the best way to tackle it is a good online system that prompts us seven days before it’s due to start the reminder process - so we chase even before it’s due to be sure we’re at the top of the pile.

Then the system matches paid invoices with the money received, which means unpaid invoices are highlighted very quickly.

2. Add late payment penalties to contracts

We also try to add penalties for late payment to the terms of the contract but be aware that this is only really ever accepted by other smaller businesses, not the large corporates.

3. Build good relationships with accounts teams

It’s also useful to build good relationships with the accounts team of the company you are billing. And it might seem obvious, but invoice promptly.

By getting the invoicing process right from the start it will be more likely to be efficient and pain-free.

4. Sign up to good accountancy software

It’s important to make it as easy as possible for your customers to pay. Some accountancy software enables recipients to pay immediately via a ‘pay now’ button within the invoice.

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